Chapter 10: Dividends on Common Shares Flashcards
What are the two sources of return that investors expect when they buy common shares?
Investors expect a return on their investment from an increase in the share price and the payment of dividends.
Why might some investors prefer shares that pay little or no dividends?
Some investors prefer shares that pay little or no dividends because companies that reinvest the majority of their earnings tend to increase their future earnings potential, along with their share price.
What type of return do wealthy investors in high tax brackets typically prefer, and why?
Wealthy investors in high tax brackets often prefer returns in the form of higher share prices, as capital gains may be taxed at a lower rate than dividend income.
Why do retired people often prefer dividends?
Retired people who need a steady income prefer to receive their return on an investment in the form of dividends, and they often seek shares that will pay relatively high dividends.
What are the three key dates involved in the declaration and payment of dividends?
Declaration Date
Date of Record
Payment Date
What is the declaration date?
The declaration date is when the board of directors officially approves the dividend, creating a dividend liability.
What happens on the date of record?
On the date of record, the corporation prepares the list of current shareholders, based on its shareholder records.
The dividend is payable only to those names listed on the record date, and no journal entry is made on this date.
What is the payment date in the context of dividends?
The payment date is when the cash is disbursed to pay the dividend liability.
How often does BCE pay cash dividends on its outstanding common shares, and how has the dividend amount changed from 2021 to 2022?
BCE pays cash dividends on its outstanding common shares on a quarterly basis.
The dividend per common share increased from $3.50 in 2021 to $3.68 in 2022.
What can a corporation do if its financial situation deteriorates in the context of dividend payments?
If a corporation’s financial situation deteriorates, it may reduce or even suspend dividend payments to common shareholders.
What accounting entries are required on the declaration date and payment date of a dividend?
On the declaration date, the journal entry records dividends declared (decreasing shareholders’ equity)
What is an ex-dividend date?
It is the date on which the stock is traded without the right to receive the next declared dividend. It is usually one business day before the date of record.
What typically happens to a company’s share price on the ex-dividend date?
The share price often decreases because the stock no longer carries the right to receive the most recently declared dividend.
Why is the ex-dividend date important for investors?
It determines who is entitled to receive the declared dividend. Only shareholders who own the stock before the ex-dividend date are eligible.
What is the dividend yield ratio?
The dividend yield ratio is a measure of the percentage return that shareholders earn from the dividends they receive.
